Give-and-take power therapy

New Delhi, Sept. 24: The Centre has conjured up a bold package designed to restructure the loans of state electricity boards (SEBs) that have racked up a combined loss of Rs 1.9 lakh crore.

Under the plan, state governments will have to take over 50 per cent of the short-term liabilities of their power distributing companies, which will then be repackaged as SEB bonds and given to the lenders. The states will stand guarantee for the repayment of these bonds.

Banks will restructure the other half of the loans they had extended and which haven’t been paid for years. The SEBs will be granted a three-year moratorium on the principal. The loan repayment terms and tenures will be recast along the best possible terms, the cabinet committee on economic affairs decided today.

This is the boldest power reform programme that the government has ever attempted. The states that choose to walk down the rocky road will get support from the Centre in the form of a capital reimbursement of up to 25 per cent of the principal repaid.

But consumers in these states will have to brace for annual power tariff increases.

Last week, Prime Minister Manmohan Singh launched a stout defence of his recent decisions and said “money does not grow on trees”. The power sector debt restructuring exercise is guided by the same principle and seeks to persuade the state governments to see the virtue of throwing off the yoke of populism, corruption and mismanagement that has bedevilled the power sector.

But the restructuring of the SEB loans will put a strain on states’ finances which is why states like Bengal — which set its face against power sector reforms more than a decade ago — are unlikely to jump at the offer.

A Bengal power department official said the debt-servicing record of the state’s power utilities “has been very good and the utilities have booked profits for years. This particular bailout package doesn’t concern us in any way.”

The states will be required to issue five-year bonds with a 10-year repayment term. The financial implication of these bonds would work out to about Rs 25,000 crore.

Others like Uttar Pradesh, Rajasthan, Tamil Nadu and Haryana have already opposed the idea of standing guarantee for the loans of their massively debt-ridden electricity boards.

However, sources said there would be a separate arrangement for these four state electricity boards with the Centre deciding to part-finance their operating losses.

States have been reluctant to push ahead with reforms because it always involves a substantial increase in utility pricing. Several have not raised power rates for close to five years.

Consumers living in gated communities that promise expensive back-up power may be more open to the idea of a small tariff increase for power drawn from the state-owned networks since this would lower their overall power bills.

Several governments had balked at earlier attempts by the Centre to persuade them to privatise their power distribution arms. Odisha flirted with power sector reforms in the mid-nineties before backtracking on them. Delhi was the only state to push ahead with a credible privatisation plan in 2002 that initially sparked massive protests from consumers unused to the idea of paying the right price for power.

The country’s state-owned distribution utilities are drowning in losses. The power distribution companies of Uttar Pradesh, Rajasthan, Madhya Pradesh and Tamil Nadu account for around 75 per cent of the total distribution losses in the country.

The Centre may also insist on mandatory open access for consumers with more than 1MW of connected load. Open access was a major cornerstone of the Electricity Act of 2003. It was introduced to ensure that large consumers of electricity could exercise their choice of drawing cheap power from a bunch of power distributors. The idea never caught fire then but could turn into a big game-changer now.